What can we learn from Alaska

Alaska is the global role model for a Citizen’s Dividend, and we have copied Alaska as well. However, there is another lesson to be learnt from Alaska: how much should we deposit into the Permanent Fund. We have argued in an earlier blog post that the only solution is to deposit 100% into the Permanent Fund. This avoids consumption of inherited capital, volatility in the government revenue budget, poor governance arising out of easy money from mining, and imposing a hidden per-head tax on citizens.

Alaska deposits only 25% of its oil money in the permanent fund. The lions share (75%) is used in the state revenue budget. The present governor of Alaska, Gov. Bill Walker, has recently imposed a 50% cut on the citizen’s dividend from the Alaska Permanent Fund. Note that the cut doesn’t mean that the government gets the other half, it remains within the Permanent Fund. Gov. Walker has explained the stunning rationale for the cut:

“When I filed for office, state unrestricted general fund revenues were $7.5 billion. This year, they’re $1.2 billion. That’s an 83 percent drop.

“The budget is now down to $4.4 billion. That’s below the spending level called for by the Alaska State Chamber of Commerce and others calling for big spending cuts — and we still have a massive deficit. We could close every school and every prison, and we still wouldn’t have enough money to pay for state services.

“We simply can’t cut our way down to a $1.2 billion budget.”

What are the options before the governor? Sell more oil at the bottom of the market? Sell other assets in a fire sale? Introduce an income tax like in other states of the US? Raiding the permanent fund is perhaps politically the most attractive option – except that the Citizen’s Dividend has made the Alaskans very protective of it.

If we think about the two counterfactuals. Suppose 100% had gone into the budget, this situation would have been much worse, and there would be no permanent fund savings either. However, if they had always saved 100% into the fund, then the budget would have correctly been at the $1.2 billion mark, and expenses would not have risen as much. And the Alaska Permanent Fund Dividend would have been 4 times as large, approximately $8,000 per citizen per annum.

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